Spring 2013 issue of Horizons

and the auditors for your component units; and revised regulations regarding the types of non-audit services that your auditors may perform for you.

In the scenario described, the firm auditing the primary government usually makes reference to the discretely presented component unit’s auditor. In this case, the firm auditing the primary government obtains the other firm’s report and indicates within the audit opinion that the discretely presented component unit was audited by other auditors. SAS 122 enhances the primary auditor’s responsibilities in these circumstances beyond those required under previous auditing standards. The primary government’s auditor must now contact the component unit auditor during the planning phase of the audit to verify the component unit auditor’s independence and competency. The primary government’s auditor must also communicate other matters of audit significance, such as related parties that might potentially engage in transactions with the component unit. At the conclusion of the audit, in addition to obtaining the component unit auditor’s report, the primary government’s auditor must ascertain any uncorrected audit adjustments, internal control comments, fraud or other significant matters identified by the component unit auditor. For many governmental entities, it is likely that the primary government’s auditor and the component unit’s auditor have not had this level of interaction in the past. As a result, the personnel of the governmental entity may need to make introductions and facilitate communication between the primary government and component unit auditors in order to permit compliance with the group audit standards. Another significant change resulting from the clarity standards relates to the appearance of the financial statement opinion. SAS 122 reformats the standard opinion wording so that it is now divided into three distinct sections with section headings.

The auditing standards leading to these changes are discussed in more detail below.

SAS 122 and SAS 125 Issued by the AICPA The American Institute of Certified Public Accountants (AICPA) establishes professional standards that every accountant conducting a financial statement audit must follow. Periodically, the AICPA issues a Statement on Auditing Standards or SAS which contains modifications to professional standards for auditors. In August 2011, the AICPA issued SAS 122, Clarification and Recodification , which is effective for audits of financial statements with December 31, 2012 year ends. Unlike most SASs, SAS 122 resulted in a massive overhaul of auditing standards in order to make them clearer—and are typically referred to as the clarity standards. One of the major changes embodied in the clarity standards relates to group audits, which are audits in which a segment or subsidiary of the auditee is audited by a firm (the component auditor) different from the one conducting the audit for the parent entity (the group auditor). In the government environment, there are several scenarios under which this arrangement could exist, the most common of which is when a discretely presented component unit is audited by a firm other than the one auditing the primary government. The group auditor and the auditee must decide if the group auditor will accept responsibility for the work of the component auditor or make reference to the component auditor in the audit opinion letter.

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